I would like to ask the U.S. contributors to Midas Oracle what they would make of a prediction market for the 2012 Democratic nomination where one contender was backed heavily, at any price, despite losing every single primary heavily for months.
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The Democratic nomination is only a once every four years event, but similar things to this happen regularly on tennis markets in the last 12 months.
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The questions are
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(1) What if Hillary Clinton herself wagered millions of dollars that she would not be the next Democratic candidate?
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(2) What if someone had the power to knock Hillary Clinton out of the race somehow had wagered millions on her not being the 2012 candidate? An example where this could happen would be the tournament where a spectator knifed Monica Seles during that tennis match in the early 90s. She would then not be able to win that tournament, but what if there is a financial incentive for people to injure participants, like with Seles? Or if someone assassinated Clinton? Should that market be paid out?
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(3) Should people be able to bet in near unlimited size on prediction markets, who weren’t regular bettors/traders? If it is a brand new account waging a quarter of a million dollars on a tennis player to lose, should that account have been restricted before placing that bet?
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(4) Should there be circumstances where a multi-million pound gamble is paid out on Obama 2012, if over a period of a number of months, someone had backed him heavily to win the nomination, even though he was losing every single primary?
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(5) If someone knifed Maria Sharapova, as happened with Monica Seles, you could make the argument that bets on that tournament should be void, if the knifeman has bet heavily on Sharapova not to win it, and because of her being knifed, she then doesn’t make the final and win. However, you could then reach a situation where someone injures a player deliberately, expecting that a prediction market would be voided, which they could also benefit from financially. A situation like this occurred in England in the seasons 1995/1996 and 1996/1997, where floodlights at soccer games were deliberately sabotaged, forcing abandonment of the matches concerned, as a result of the saboteurs not liking the half time scoreline. There is an incentive for someone to bet heavily against a Seles or a Sharapova, and then seriously wound or assault them to alter the outcome of a sports prediction market, but there is also an incentive to try to get a prediction market voided. The knifeman benefits from ensuring that Sharapova or Seles cannot win the tournament, but the saboteur benefits from the market being voided. The answer to the first one is probably to void the market due to foul play, removing the financial incentive to knife a female tennis player, but the chance to get a void market will provide a financial incentive to try to get the event abandoned,………. how should the arbiters of a prediction market put the right safeguards in place to remove financial moral hazard from the market?
Answer these questions below this present post or here.
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*Just to stress, the situation being presented is a hypothetical Obama 2012 Democratic nomination campaign versus a Hillary Clinton 2012 Democratic nomination campaign, where Clinton wins every primary for months, but huge money is gambled on the prediction markets on Obama winning the nomination. After four or five months, Hillary Clinton despite a commanding lead then suddenly withdraws, and Obama gets the nomination, with the inspired money proving to be correct in having been backing Obama for months, despite him losing every 2011/2012 primary. Thanks
Observation:
It is perfectly legitimate for a Referee to limit the extent of participation that any bettor may adopt. Consider the era of “gentlemanly duels”. Would an honest Referee allow Alfred to challenge Bert to a duel (to the death) if he knew (or even suspected) that Alfred had yesterday been diagnosed with a terminal disease, and this morning had laid himself – his entire net worth – to LOSE the proposed duel (presumably to endow his surviving orphans etc etc)?
In fact, there is a strong argument that it is pefectly illegitimate for any Referee to “turn a blind eye” to such dilemmas.
He has a Duty of Care to his Clientele. ……..ALL OF THEM!
Not just the ones who win regularly, or place the most bets via software “bots”, or those who carefully never criticse him in places like this. And especially to preclude (or at least limit) those who pretty darned obviously will not be traceable should anything untoward be detected during the Event itself…..
Of course that Duty of Care is onerous….it might seem initially that the Referee is making “money for old rope”. Realisation then dawns that taking commission involves delivery of Betting Integrity, and that it is NOT acceptable for the Referee to claim its everyone’s/anyone’s problem EXCEPT his, AFTER he’s banked his commission!
The buck is made by the Referee; The buck STOPS with the Referee.
IMHO, migration of the Referee to a location where (possibly) fewer such questions will be asked is NOT credible either!
The best way to make a quick buck is to drug a player, then bet against him/her.
Everyone can become a millionaire… in the UK. I said it before, the US is not the land of opportunity, not anymore. It’s the UK.
I may be looking to expand my business there myself. After all, my shop for Britain’s finest is doing exceptionally well, and the horse I bought is providing evidence, at last, that altruistic behaviour does occur with animals.
1-2) These markets could have insider trading restrictions and forced settlement w/ new contract set.
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3-4) The CFTC/NFA could monitor a “large trader” list and have special reporting requirements for them. If trading seemed unreasonable given the objective outlook for a candidate, they could begin an investigation.
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5) Don’t void or unwind the market, just settle the contracts at the price immediately before the event and then start a new set of contracts as soon as possible.
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The only problem there is what happens when a price manipulation precedes an event such that the manipulated outcome locks-in the “manipulated” prices. The arrangements in 3-4) would go a long way towards addressing that scenario. Failing that, contracts could be worded in such a way to allow for freezing funds and unwinding trades in that sort of situation. Also, it would be difficult for a trader to set-off a feedback loop in a liquid binary market even if they were very large.
[…] Site Map He asks questions; you’ll provide answers. […]
@Jason Ruspini: fyi
http://www.nytimes.com/2008/05…..nted=print
@Ed Murray: Get yourself a gravatar.
With all due respect Jason, your suggestions will not prove to be effective in dealing with insider trading.
Chris alrady pointed out the problems we’re currently having in the traditional financial markets in that link. There we have the SEC and FSA who are watching it closely.
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In sports prediction markets the underlying problems are a lot worse. I will mention a few.
The reward is about 7-fold the reward of traditional financial markets.
Insiders are better capable of influencing the outcome of an event.
In theory, anyone can “become” an insider. That applies most to organized crime.
Rugulators in the gambling industry don’t know what they are doing or what they are dealing with, yet.
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I don’t feel like pointing out what you’re missing (one of those lazy days) but I will mention this.
It all boils down to the reward/risk ratio for insiders.
You can either increase the risk or reduce the reward when battling insider activity.
The former will be inefficient, very expensive and ineffective.
The latter makes more sense – take away the incentive.
Not dealing with this problem will result in “ordinary people” becoming criminals. That’s because our policies are wrong. You can witness the same thing as a result of current tax laws.
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The answer has already been given, here on Midas Oracle.
Restrict new accounts to $1,000 bets, at first. Reduce the reward, thereby the reward/risk ratio.
There are restrictions imposed on stakes in most forms of gambling. Why? To provide protection for the house, or possibly to protect the gambler against himself.
Why do we not have any restrictions on betting activity with betting exchanges ? Because people bet against each other ?
That doesn’t mean we can let people bet unlimited amounts of money. I will go 8 steps further, it is exactly what we need in order to deal with a huge insider problem effectively.
Think about it Jason. There will be a lot of pain if we don’t get this one right.
Medemi, In my “measured enthusiasm”, I’ve been the first to point out the many ways in which these markets might go bad and one of the motivations for that was to avoid ever having that last sort of remark thrown at me, or other PM proponents for that matter. I’ve also already indicated that small stakes would be a very good way to combat manipulation – but there is something vastly unsatisfying about that – because I ALREADY have tens or hundreds of thousands of dollars at risk on the election and government policy!!
I’m more worried about outcome manipulation than insider trading per se, which is mostly legal with commodities and leads to more information in the market.
Patri Friedman makes a point that sports matches are relatively easy to fix because they are relatively meaningless. By your line of thinking, a candidate that promises a trillion dollars of redistribution should have an “accident” within three days or so. We don’t see this in the US, and the amount of money at risk in a market would be much smaller.
Jason,
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I was talking about the risks and policies associated with sports betting. An election is different.
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I was having a look at the price of oil yesterday and I witnessed this typical 3 or 4 stage acceleration in the price of oil. I don’t like what I see and it reminds me of the housing bubble where everyone was made to believe (deliberately?) that prices will continue to rise forever. It smells of market manipulation to me.
A big difference is that prediction markets settle based on some objective measure at a certain point in time. Liquidity aside, futures and stocks are vulnerable to manipulation in ways that binary event options aren’t. By contrast, what does the price of crude oil “mean”? To start with, you have to consider what the price of every other asset means!
There is no doubt that speculators can make markets more volatile in the short-run and intensify price climaxes. But there is a disincentive for them to do so without a fundamental basis, and just who are these “speculators”? Michael Masters cites pension funds and says that they should be disallowed from investing in commodity indices. So pensioners should have no recourse against inflation and should see their savings and real rates of return in other assets dwindle or go negative? (Although the government is kind enough to distort inflation numbers and real rates of return, as well as raising food prices through the ethanol subsidy.) To me, high commodity prices are largely a signal that projected real rates of return on paper-money assets are unattractive.
To me, high commodity prices are largely a signal that projected real rates of return on paper-money assets are unattractive.
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But there’s more to it. What I don’t like specifically about crude, is the story which hit the news recently that crude will go towards $200/barrel. Where did this story come from ? Those with vested interests, no doubt. Could be the large institutional investors, I don’t know, but something is not right. Especially when you take a look at the technicals – the price of crude is already in a blow-off stage and could be stabilizing or dropping soon.
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It was Greenspan who spoke the famous words “irrational exuberance” back in 1996, and he was right. He knew exactly what he was doing IMO, but was unable to talk sense into people. Well, our economy has it’s own way of dealing with things. That is, boom and bust. House prices, same story. Crude, same story IMO.
Pyramid schemes comes to mind. People have gone to jail for less.
I will have no part of it. In 2003 I decided to invest my money in companies based on fundamentals.
The price of oil can go to $300 for all I care. Means less trafic jams for me. But some people are really hurting at current price levels. And the government doesn’t care.
[…] Of interest to Jason Ruspini, regarding his last comment on Midas Oracle. […]
Thanks for the reply Jason. Can I try to pick at a few bones?
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1-2) These markets could have insider trading restrictions and forced settlement w/ new contract set.
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Most (,…?) prediction markets are internet-based, and legal protection or trading restrictions etcetera are normally reactive retrospective frameworks to prevent repeats of previous examples of chicanery or skulduggery. There is always another loophole, and it is usually one that people haven’t foreseen. If Hillary Clinton 2012 was miles ahead of Obama 2012, and winning every primary, with a multi million pound gamble on the prediction markets that she wouldn’t be the Democratic candidate, there are so many risks involved. The prediction market itself could be influencing events – a candidate who was diagnosed with a terminal illness, but was in the lead might stay in the race, so that they would have more time to feed money into the market. It would make for a huge inheritance to their children. A candidate who was miles in the lead might realise they have a once in a lifetime opportunity to place a huge bet on themselves not being the Democratic nominee, and the multi-millions of pounds on offer for a relatively tiny outlay, might lead them to withdraw from the race, in order to alter the result of the prediction market. Obama 2008 could make a fortune betting on himself not to be the Democratic candidate, and then withdraw, and spend the rest of his life on a beach somewhere. Ok, the Democratic nomination is not a perfect case study, but there are countless prediction markets out there, some of which will have a morally hazardous corruption of the actual market result, by one (or more) of the participants involved.
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What if there are no insider trading restrictions in place? What if accounts placing huge wagers on a seemingly near-certain candidate to not become the actual nominee, are located in territories where they cannot be extradited from? I think over here, there are some sports which don’t have governing bodies co-operating with the prediction market protagonists, I’m not sure there is a Memorandum of Understanding between the snooker authorities and any of the exchanges (there may be one in place, but I don’t think there is at the mo,…..). The Big Brother exchange market is a multi-million pound one each year here, but there is no co-operation with the producers of that show. They have said to me they despise Betfair, because of the constant negative publicity every single year with allegations of betting scams related to the Betfair market, for example
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http://www.dailymail.co.uk/tvs…..g-fix.html
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Big Brother’s betting fix
Scam: Rumours of insider dealing surround Nikki Grahame’s return to the house
Accusations of rigging continue to plague Big Brother as it now emerges that thousands of pounds were staked on Nikki Grahame to win even after she was evicted from the show.
Several mystery big cash bets were placed on Nikki at 1,000-1 after her eviction, sparking fears that insiders knew she was going back into the house and decided to cash in.
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The thing is, there was zero protection in place for people wagering on that prediction market. They allowed a 999 to 1 contestant who had been eliminated, back into the show, and to be eligible to win. It didnt’ matter that she subsequently didn’t go on to win, the Betfair software allows you to match up bets where you have backed at a high price (999 to 1), and then lay off at the price she then traded at (I think she went down to about 5 to 1)
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Is it acceptable if the prediction market itself is driving events? I think the answer is no, and said that to Betfair face to face. If a market cannot be run independently of real events, it should not be offered any more. There is no perfect solution, as a “scam” like this could affect one market, but if an event, or participants in an event, aren’t trustworthy, there is no need to offer either future versions of that event, or matches featuring those participants. Both Arguello and Davydenko had both had a number of suspicious matches before their encounter with each other, and had BF “red-carded” the two of them, the Davdenko v Arguello prediction market carnage would never have happened, and that match would have been played out normally. Its worth noting that since that match with the negative publicity, every Davydenko market since that has been run, has behaved in a normal fluid manner, with the prices reflecting the current scores/state of play.
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3-4) The CFTC/NFA could monitor a “large trader” list and have special reporting requirements for them. If trading seemed unreasonable given the objective outlook for a candidate, they could begin an investigation.
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There is no “large trader” list for sports prediction markets. I think we need either a monitored large trader list (a brand new account from a high roller staking huge money is not a problem, as long as he/she is betting on a level playing field, independent of the result of the prediction market). However, there is an intrinsic flaw in the logic of having one, as a prediction market provider has a financial incentive to decide to take a very soft line towards any big account, as is the case currently with the betting exchanges in the UK. Its probably better to remove temptation and have a maximum initial stake on a new account, and then let that maximum bet on that account grow organically over time. This isn’t perfect either (a high-rolling account can be used by a match fixer, should the two subsets of high-rollers and match fixers come into contact with one another), but it would be a drastic and overwhelming improvement on the status quo.
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5) Don’t void or unwind the market, just settle the contracts at the price immediately before the event and then start a new set of contracts as soon as possible.
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People wager according to their own estimates of the probabilities. The prices on the prediction market may not accurately reflect the real probabilities of an event happening or not happening, so it could be intrinsically unfair to settle the market at midpoint. There is a problem here as well for sports prediction markets – many people have bets with both bookmakers and on the exchanges simultaneously, and there would be no uniform settlement. This happened with a golf tournament in either 2006 or 2007, where the tournament was completed over a shortened number of holes, due to terrible weather, and caused a big rumpus over here. I think it was a (fairly big) tournament on the US tour, but I cannot remember the name of it.
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The goal is to remove a financial incentive/moral hazard from the runnings or final result of a prediction market. Settling at midpoint in a tennis tournament could be a nightmare – what if Seles was stabbed, but her main rival was at that moment a set and matchpoints down against another competitor. What if Seles’s main rival then came back to win that match? Betfair staff are allowed to and encouraged to bet on Betfair (which I agree with, it helps them to understand their own product when they are dealing with customers), but what if the person deciding the time of midpoint had a personal position themselves on the market? In that case it would have been better for Betfair to not allow the arbiters/midpoint settlers, to bet into the BF market, which would be a change of current ethos.
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The overall goal is independence of prediction markets from offering financial motives to the participants to alter the result or the intra-trades on the market. The current non-p
roactive climate, where people can bet in super size freely, with positions that bookmakers would never accept on brand new accounts, is imo not the right one, and will hopefully change.
Oh, it will change Ed. Once betfair figure out that the damage being done is not only limited to the rest of the planet, but is hurting betfair as well. At which point we’ll probably have to listen to more crap from them.
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Amazing story in the dailymail btw….
[…] Via Ed, The Daily Mail: […]
Ed, In principle you’re right of course. Something might always slip through the cracks, but in practice, the safeguards that I mentioned should be effective enough that election and policy markets are a net positive, and by a wide margin. Most of your examples are specific criticisms of the status quo among Betfair and online bookmakers, who seem to have no strong, careful regulator like the CFTC.
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Election markets would have to be restricted to domestic non-proxy accounts, somewhat like what Hedgestreet used to do. It would take resources, but from what I’ve seen the CFTC and NFA have the infrastructure in place to sniff-out proxy accounts pretty well. They also have the authority to enforce large trader lists. The exchanges just don’t have a choice. Exchange employees are also prohibited from trading on inside information gathered in their exchange duties, so they would legally be unable to take a position and then decide on the settlement. (the rules for which would be well-determined in advance anyway).
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Even if an election or policy process developed very quickly and was structured like a tennis tournament (where individual matches can immediately and completely determine the outcome of tournament-level contracts), in your example, if you were short Seles at the tournament level and you thought that she settled too high, you could go out and bet on her main rival at the match-level while she was still down. It might be disruptive and sub-optimal, but doesn’t mean the method is fundamentally flawed.
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Again, there are already trillions of dollars riding on elections and that has not seemed to produce the moral hazard of the kind you mention. Please keep the criticisms coming though!
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Medemi, Self-fulfilling prophesies are possible but difficult for speculators to cause even with a fundamental basis. No doubt there is some aspect of a pyramid scheme to the price of crude, but how do you say what its worth should be compared to paper-money assets paying paper-money dividends? That seductive meme of energy-as-currency is more dangerous to the price of gasoline than the $200/barrel call. (and you could possibly begin to quantify the effect of the latter by looking at option prices before and after the media recently picked up on the call.) I think governments are starting to care and these commodity markets have already become a political battle ground.
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You can always find individual equities that put up huge returns. So.. what stocks do you currently like? Or would it be immoral to tout them?
Election markets would have to be restricted to domestic non-proxy accounts, somewhat like what Hedgestreet used to do. It would take resources, but from what I’ve seen the CFTC and NFA have the infrastructure in place to sniff-out proxy accounts pretty well. They also have the authority to enforce large trader lists. The exchanges just don’t have a choice. Exchange employees are also prohibited from trading on inside information gathered in their exchange duties, so they would legally be unable to take a position and then decide on the settlement. (the rules for which would be well-determined in advance anyway).
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Cheers – that set of regulations sounds absolutely mouthwatering in comparison to what we have here on the sports markets.
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Hopefully we’ll get something like that one day
Hi Jason,
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I came across this graph recently – “lifecycle of a bubble”.
It’s interesting to see that institutional investors are not causing the bubble, according to this chart.
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http://www.housepricecrash.co……ecycle.php
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I’m invested in biotechnology, nanotechnology and internet (IT) companies.
ok, I will name one – Medarex (MEDX)
It’s cheap now because there’s not a lot “on the horizon” and they’re burning cash pretty fast.
Even faster now because I believe they’ve expanded their product-pipeline from 9 to 12 potential new drugs.
They will come up with something a couple of years from now IMO and I like their agressive mode, because they have some brilliant people working there. I doubled up my investment on this one 2 months ago. Very high risk investing…
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I’ve been an active trader on the Nasdaq between 2000-2003, and pretty good at it. But I want to make some money in a responsible way. And the challenge for me is to be ahead of the smart money. Very difficult.
Biotech takes time and at this point I find it too distracting to have in my portfolio in any size. Whenever you’re long an individual biotech name, you just have to expect a sudden FDA-related 15% gap-down. Also the sector, relatively speaking, never really benefited from the emerging market build-out.. depending on what index you look at, its just gone down or sideways for a number of years. There are always good opportunities though. It just takes time. It would be nice if there were a wiki with each company’s pipeline, drug status, size-of-market, etc.
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Here is a decent book on bubbles with good historical charts:
http://www.amazon.com/Hidden-C…..amp;sr=8-1
The company I mentioned was a tip from someone who studied biotech companies for a living. He works for himself now. Don’t know if he would be a buyer at the moment because I haven’t seen or spoken him for quite a while.
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I’ve been in and out of these stocks a couple of times over the years, I guess there’s still a bit of a trader in me.
That has changed recently though – no more trading. For my strategy to work I only need one winner, BUT I have to hold on to my stock. This is the hard part.
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An entire book on bubbles ? That’s too much for me to handle.